The Hindu Business Line : Steps on cards to raise agriculture cover

Agriculture insurance in the country could eventually become a risk mitigation tool for farmers as some significant changes are on the anvil. While it may take a year for sweeping changes to take place, a few crucial steps could be taken this year.

The Working Group on Risk Management in Agriculture has submitted its report for the Eleventh Five Year Plan (2007-2012) asking the Government to earmark Rs 28,000 crore (for crop, livestock, pilots on farm income insurance, seed insurance and weather insurance) and also set a lofty target of insuring 40 per cent of the farmers by 2011-12.

The Government supported National Agriculture Insurance Scheme (NAIS), which is the largest crop insurance programme in the world in terms of the number of farmers, was introduced during the rabi season of 1999-2000. Until 2005-06, it has covered 7.9 crore farmers for a premium of Rs 2,332.50 crore and finalised claims of Rs 7,255.75 crore.

Experts have pointed out several inherent flaws in the scheme and in the past few years, Government-appointed committees have recommended several modifications.

A crucial change is a shift to an actuarial-based system. The premium under NAIS is currently not actuarial but a flat-rate, ranging from 1.5 per cent to 3.5 per cent of the sum insured based on the crop.

Currently, the premium rates are 3.5 per cent for oilseeds and bajra and 2.5 per cent for cereals, millets and pulses, during kharif. In the rabi season, they are 1.5 per cent for wheat and 2 per cent for food crops and oil seeds. The rates for horticultural crops are, however, based on actuarial estimates.

The Working Group has evolved a new premium structure under the actuarial regime. Under this, the premium could range up to 20 per cent of the sum-insured and the subsidy by the government could be as much as 60 per cent subject to a minimum net premium of 6 per cent. The group has also suggested crops be divided into two groups for the actuarial regime: Viable lines (with matured loss history) and risky lines (with moderate to high loss history). While the insurance company would be responsible for all claims with reference to viable lines, the Government would provide `stop loss' arrangement for `risky lines', beyond a claims ratio of 200 per cent.

Around 85 per cent of the farmers covered under NAIS are borrowers, who have to compulsorily buy insurance along with their loans. The crop insurance claim paid during an adverse season is automatically adjusted against the outstanding crop loan, leading to the recovery of dues for financial institutions.

The group has, therefore, proposed that banks and financial institutions should bear a part of the premium- around 25 per cent of a farmer's premium subject to a maximum of one percentage of the sum-insured.

The insurance cover could also be provided on the basis of maximum borrowing limit, instead of actual loan amount availed. The maximum borrowing limit would be based on the size of the farm, the crop and the cost of cultivation.

The sum insured in the case of loanee farmers is the amount of loan availed, which can be further extended up to 150 per cent of the average yield. For non-loanee farmers, it can be up to a value of 150 per cent of the average yield.

Experiment revived

An experiment, conducted a few years ago, could also be revived. NAIS protects the farmers only against yield fluctuations, while price fluctuations are outside the purview of the scheme. To take care of the variability in income arising out of fluctuations in the yield and market prices, the Government introduced a pilot project — Farm Income Insurance Scheme (FIIS) — during rabi 2003-04.

The objective of the scheme was not only to universalise the minimum support price and protect the income of the farmer, but also to reduce Government expenditure on procurement of wheat and rice. The other objectives were to encourage crop diversification and trigger private trade. The scheme was discontinued, just after the general elections of 2004.

The working group has suggested the guaranteed income should be based on either `futures' price from commodity markets, or should be derived from historical market prices. In case it is decided to use historical market prices, an appropriate correction factor need to be factored in, to compensate for inflationary trends. Farm income insurance could be tried for pulses and oilseeds, which are both price sensitive.

The proposal is that a pilot could be launched from kharif 2007, covering a few crops, from pulses and oilseeds, spread over 40-50 districts in the country. The premium rates charged would be at par with those charged under `area yield' insurance.

Weather-based insurance

The Finance Minister, Mr P. Chidambaram, in the Union Budget has also announced a few steps that could bring lasting change. He announced a weather-based crop insurance scheme on a pilot basis in two or three States.

The scheme will be operated on an actuarial basis with an element of subsidy. The Budget has allocated Rs 100 crore for the pilot in 2007-08. Experts say this is the first time the Government has endorsed a weather insurance product. The pilot is likely be implemented at the block level and will be conducted only in those areas where historical weather data for the last 25 years is available. It could be operational in rain-fed farm areas such as Jharkhand, Maharashtra, Karnataka and Uttar Pradesh.

The Government also plans to continue NAIS in its current form for kharif and rabi 2007-08. However, weather-based insurance would make a significant change in claims-settlement. Under NAIS, the claim settlement is based on yield data and the farmer is in for a long wait before compensation comes his way. A weather index as a proxy indicator could release a portion of the claims settlement during the season.

Apart from agriculture insurance company, two private companies — ICICI Lombard General Insurance and Iffco Tokio General Insurance — are making strides in the area of weather-based agriculture insurance. Insurers say with the Government's support, agriculture insurance could receive the required fillip.